Some people think that current Obama administration policies are leading us to socialism, If only. Socialism, after all, is a recognized economic system that differs from capitalism in its views on ownership and wealth distribution. A rather benign system, whose only major defect is that it doesn’t work very well in the real world.
What’s going on in Obamaland these days when it comes financial and economic matters isn’t socialist. It’s an approach to trying to save a faltering economy so radical it has yet to have a name. And if it doesn’t scare you, your doctor is probably over-prescribing your Zoloft.
First, we get this Paulson-cum-Geithner bank bailout excess. The aim here is to fill the black hole banks dug for themselves with $700 billion in government money to date and more sure to follow. Then Obama chimes in with another $750 billion in stimulus spending of borrowed money with another stimulus package (or two) in the wings. Then Bernanke at the Fed comes along with a $1.2 trillion increase in the money supply via the government buying its own debt (don’t try this at home!) in order to get more of the stuff in circulation—an effort perhaps, by the academic Bernanke used to be, to create a new case study in Gresham’s Law that bad money drives good money out of circulation.
And now, this very week, we have the creme de la creme of financial and economic nuttiness on view. FASB (the Financial Accounting Standards Board), whose rulings determine how we measure value in this world, is poised to make a new rule change. Prodded into doing so by one of the great statesman and keen thinkers of our time, Representative Barney Frank, FASB is going to change the mark to market rule in a way that will improve the look of bank balance sheets.
Mark to market is a simple to understand concept. You value the assets on your books at their current market value. The new rule, however, would allow banks far more leeway in this regard. They could opine that some of their assets are really worth more than current market valuation, and in so doing increase their reserves, which in turn would allow the banks to lend our more to business and consumer—at least theoretically.
Now maybe some of these assets are, in fact, worth more than current market valuations because the market is in such deep funk today that its valuations may well be warped on the downside. But that’s not the point. The point is consistency.
Ever since Adam Smith noted in his Wealth Of Nations that consistency is far, far more important than accuracy, sensible people have understood the inherent dangers in changing financial number systems to meet a temporary challenge. Sure, letting banks revalue their assets upward might cause a near term bounce in lending. If we could all change the value of our own credit scores upward we could also allow us all to borrow more. But only a fool, or public and quasi-public officials in the throes of mass hysteria and panic, would take such steps.
We should all be very afraid when it comes to the current financial and economic crisis. But if you aren’t even more afraid of the solutions being put forth by our masters in Washington, you just haven’t been following the news closely enough in recent months.